Washington’s accusations weigh heavily: Major ocean carriers managed to make exorbitant extra profits during the pandemic by demanding skyrocketing rates, fueling inflation and reducing the purchasing power of consumers. It is mainly the German ocean liner, Hapag-Lloyd, that has been caught in the crosshairs of the Biden administration and the U.S. Congress. In March, Hapag-Lloyd announced a record EBIT of €9.4 billion / US$11.1 bn for fiscal 2021, although that profit is in line with the annual results presented by its competitors MSC, Cosco, One, Evergreen, and others.
Hapag-Lloyd is not the only addressee of letters sent by the two U.S. congressmen: James E. Clyburn and Raja Krishnamoorthi. Similar post was received by Copenhagen-based A. P. Moeller-Maersk,
and CMA CGM of Marseille. In their letter to Hapag-Lloyd, the politicians asked the management of the Hamburg-headquartered shipping company to submit internal documents on freight rates charged
to customers, for review.
Record Ebit, marginal taxes
For the entire naval industry, the past year turned out to be a financial Eldorado. In the case of Hapag-Lloyd, another factor plays an important role in profits: the tonnage tax. This is not based on the annual profit generated, but on the size of the vessels operated. In bold figures, this translates into €60 million that Hapag-Lloyd had to transfer to the German tax authorities in 2021 – less than one percent of its annual gains. This means that last year’s pre-tax profit almost equaled the after-tax surplus. Nevertheless, for an average taxpayer, it is hard to comprehend that an enterprise reporting a record annual Ebit of €9,4 billion must only pay €60 million to the state treasury.
For the two U.S. Congressmen, Clyburn and Krishnamoorthi, however, that debate is just a side issue. Their main concern is U.S. consumer protection. In their letter to Hapag-Lloyd, they complain that freight rates have risen disproportionately compared to operating costs, resulting in “excessive profits”. Numerous goods have become significantly more expensive as a result of Himalayan-high freight rates, they say, reducing purchasing power and making everyday life way more difficult for many people in the States. “We are deeply concerned that Hapag-Lloyd may have engaged in predatory business practices during the pandemic, making numerous goods much more expensive for consumers and small businesses,” they boldly suspect.
Biden targets ocean carriers
Their critical words also reflect the view of U.S. President, Joe Biden. In his State of the Union address on 01MAR22, he announced a “crackdown” on the “Ocean Carriers”. “Foreign companies have raised their prices by as much as 1000 percent and raked in record profits,” Biden criticized. “I hereby announce a crackdown on these companies that are ripping off American businesses and consumers.”
The two congressmen, who chair two subcommittees looking into fraud, abuse, and profiteering during the Corona pandemic, among other things, have since demanded the release of company documents issued and filed since 01JAN20. That includes freight rate calculations, market analysis, or correspondences with other shipping companies.
The USA is partly to blame for the situation
In a response, Hapag-Lloyd acknowledges a sharp increase in rates but argues that the price hike results from the ongoing gap between available transport capacity and high market demand for sea transport. The shipping line also points to the U.S.'s own responsibility in price developments. For example, the U.S. imported significantly more goods during the pandemic than in the months and years before, causing congestion at major seaports like Long Beach, for instance, delaying deliveries, upping sailing costs, and leading to a massive shortage of available containers, with many of them stranding at warehouses or seaports. In its reply to the Congressmen, the shipping company firmly rejects the accusation of cartel-like agreements.
Tax regime will not be changed
In the meantime, Hapag-Lloyd has reportedly begun sending some of the documents requested by the U.S. Congressmen to Washington.
Back to the tonnage tax levied by the German state authorities: There will be no changes, despite some criticism, announced the City of Hamburg that holds 13.9% of the Hapag-Lloyd shares. Similar voices are heard from the German Ministry of Finance. The Hamburg Senate (city government) admits that the tax burden in years with high profits would be low under the existing arrangement. But, in return, German shipping companies would also have to pay taxes in loss-making years. This provision helps them to survive in global competition and to weather periods of economic drought.
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